Why Walmart will stick to India’s retail story, despite hurdles

When Walmart Stores Inc, the world’s biggest retailer, and Bharti Enterprises decided earlier this week to go their separate ways, there were few gasps or shake of heads. Actually, we could be forgiven for thinking that it took them so long to end it. The alliance promised much when it was launched six years ago, but delivered little. Why? The reasons are plenty.

The first reason has to be the vague FDI rules. Previously, foreign retailers were allowed only in the wholesale, or cashand-carry, business, which Walmart took advantage of to enter India. The government eased rules in September 2012, paving the way for foreign retailers to enter the front-end retail format too.

But Walmart was reluctant to introduce this format as the rules were vague and restrictive. The rules have discouraged other foreign retail majors too to invest in the country. Even on the cash-and-carry front, Walmart did not open a store in India for about a year despite earlier plans to open eight in 2013.

Rocky Path

Of course, FDI rules weren’t the only reason. Walmart has been facing a decline in like-for-like sales (a comparison of a year’s sales to the previous year’s sales of a company in its home market), closed several stores in China and has still to complete introduction of EDLP pricing (promise of the lowest available price) strategy in Latin America. With the deteriorating outlook for generated profits, the retailer had to set priorities and revise its international expansion plans.

Walmart is also smack in the middle of an internal anti-bribery probe launched in the US in November 2012. That probe invited an investigation by India and consequently, led to the suspension of several top managers. It didn’t help that Walmart spent $25 million between 2008 and 2012 in India on various lobbying activities to facilitate its entry.

Unfortunately, the incident played into the hands of opponents of FDI rules in retail. Here, Walmart should have tended to its garden the Ikea way. The Swedish furniture retailer too has a proven record of lobbying in India. But Ikea, a single-brand retailer, spent lots of effort and time in negotiations to get a clarification on FDI rules in single brand retailing before it decided to expand in the country. It is safe to assume that Bharti was viewing these developments with discomfiture. For some time, it was reconsidering its commitment to the partnership by pointing to “distant prospects of returns”.

In July 2013, Bharti Retail returned 17 properties, which it had leased across the country to open Easyday stores, back to landlords. This was a clear indication that there would be no more joint plans to develop a front-end retail network. It is possible, in the context of these developments, that some bitterness crept between the two partners, exacerbated later by a seeming clash of cultures. So it’s not surprising that Walmart was keen to end its relationship.

Bet on India

But what about the relationship with India? Make no mistake — Walmart will stick around. Indeed, in its statement announcing the split, Walmart has said that it will work with the government to create “conditions that enable FDI in multi-brand retail.” However, it would be wrong to expect that Walmart would wait for a perfect setting — like 100% ownership in the multi-brand retail.

Consumer and market knowledge of a local partner will be crucial (it has no choice but to find another Indian partner to own 49% of the business to establish its retail stores). Therefore the retailer may replicate in the country a strategy which proved to be successful in other emerging markets. A new JV partnership or an acquisition of a minority stake in a local player with an option to gain a majority stake later could be on the cards.

Walmart has expanded in Mexico through a JV and through an acquisition of a minority stake in Japan and China. Walmart cannot give up on India because of the potential of its retail market. India is set to become the world’s third-largest retail market by 2018, with food retail format sales accounting for $1,066,922 million, following China ($3,160,917 million) and the US ($1,442,146 million).

Road Ahead

Walmart is unlikely to repeat the mistake it made in another key emerging market, Russia, where it failed twice to grabM&A opportunities. Today, an entry into Russia via the organic route is extremely risky and M&A opportunities are limited. Walmart’s missed opportunity in Russia is in sharp contrast to the fortunes of French retail powerhouse Auchan, which has grown in the country annually by 22% (in dollar terms) in the past five years.

For now, Walmart will have to be content with its existing cash-and-carry business (it may put the expansion of frontend retail on hold for two years). That gives a great advantage to local players to improve efficiency as well as to foreign players like Auchan and Tesco. While the former will be quickly opening its hypermarkets in a franchising agreement with Landmark Group, the latter will be testing small retail formats in cooperation with its franchisee partner Trent.

Despite its difficulties, Walmart has good prospects at least in the Indian cash-and-carry retail. This sector is fragmented and nascent at that. Walmart-Bharti opened its first BestPrice Modern Wholesale cash-and-carry outlet in 2009. It has since expanded to 20 stores, making it the second-largest in India. Walmart’s closest competitor in this format in India is Metro Group. Whereas Metro has only lately expanded into tier II and tier III cities, Walmart Bhartihas a first-mover advantage.

Carrefour and Booker operate only a few stores while Reliance Retail has started to invest into this format only recently. Despite the limited competition, Walmart does not generate profit in India. Bharti Walmart’s annual loss grew 34% to Rs 372.32 crore ($63.9 million) for the year ended December 31, 2012, from a year ago.

This was despite an 80% increase in its total revenue at Rs 3,381 crore against Rs 1,876 crore the previous year. The accumulated losses as of December 31, 2012, stood at Rs 1,137.7 crore. Yet, these are early days to wager a judgement. Many foreign retailers operating in emerging markets need up to 10 years to break even. Though front-end retail looks a long term goal, exit from a lucrative market like India would not be smart.

Walmart should stick to its cashand-carry format for now. Due to the absence of structured wholesale networks, especially outside large cities, India offers a great potential for its Best Price Modern Wholesale stores. No one these days can afford to ignore India. Not even the world’s biggest retailer.

-By Milos Ryba
(The writer is a research director and head of emerging markets at Planet Retail, a global retail consultancy.)
-http://economictimes.indiatimes.com/news/news-by-industry/services/retail/split-with-bharti-why-walmart-will-stick-to-indias-retail-story-despite-hurdles/articleshow/24053775.cms